Global economy flashes recovery, but stocks falter

AgenciesSep 2, 2009, 03.52pm IST

MELBOURNE: The global economy flashed signs of recovery on Wednesday with unexpectedly strong growth in Australia and US manufacturing expanding for the first time for 19 months, despite a stocks setback.

The news followed a steady drumbeat of improving if uneven data from top world economies, with France and Germany leading a gradual rise out of recession in the 16-nation euro area and company earnings showing the worst may be over.

"A stronger US manufacturing sector could help underpin the global recovery, and provide support for commodity prices," analysts from Dutch bank ING said in a note after a closely-watched index showed growth in the US factory sector.

World leaders, however, have been cautious about declaring any victory in the epic battle against recession and have warned that recovery will be slow as they focus on the looming dilemma of how to exit stimulus programmes.

The outlook is set to dominate talks between finance chiefs of the G20 top world economies this week in London ahead of a G20 summit later this month.

"The global economy is not out of the woods yet by a long stretch," Prime Minister Kevin Rudd said even as data showed Australia's economy growing 0.6 per cent in the second quarter - the best result among developed countries.

His Treasurer Wayne Swan sounded a more upbeat note, calling the result "remarkable" given the fragility of the world economy and saying: "Today's result means we are the fastest growing advanced economy over the past year."

Resource-rich Australia's shipments to China and its government stimulus have helped shield it from the worst of the global downturn, with the only blip so far an 0.5 per cent contraction in the final quarter of 2008.

On Tuesday, US President Barack Obama also said growth in US manufacturing was "a sign that we are on the path to economic recovery." But, as jobless figures rise, he warned: "There is no doubt we have a long way to go."

Reacting to the US data, Paul Dales, US expert at Capital Economics, a research consultancy in London, also gave a more nuanced view.

"The good news is that the recovery in the US manufacturing and housing sectors appears to be gathering pace. The bad news is that it is still not creating any extra jobs," Dales said.

"It is worth remembering that the recovery has not even begun in the all-important consumer sector," he said, adding: "Overall, it's shaping up to be another jobless recovery."

Experts warn major headaches for the world economy still lie ahead as some government stimulus programmes begin to wind down, unemployment rises in major economies and concerns linger over the banking sector.

In Germany for instance, fears rose on Wednesday of massive job cuts in the giant auto industry as a giant five-billion-euro (7.1-billion-dollar) government "cash-for-clunkers" programme wound down.

Stock markets have also shrugged off the upbeat economic data and tumbled around the world this week despite recent rallies amid concern about what the future holds and a rush by traders to cash in quick profits.

"Compared to last months' optimism, investors seem afraid of fear itself, more than anything else," said Daniel Roy, equities analyst at Newedge brokers.

"Across market players, it is generally accepted that a correction is due on equity markets" after strong recent gains, he added.